Research articles for the 2020-12-08

A Case Study Heller Financial
Branch, Ty
First, the goal of this paper is to examine this case study about Heller Financial as they focus on enterprise risk management (ERM), credit risk (CR) and operational risk management (ORM). Heller Financial began implementing the process that would evaluate the overall procedures that now makes their ERM program successful. Heller decided that they would adapt to risk management a process that would eventually lead senior management to create a Credit Risk Officer (CRO) as well as, the creation the (ORO) Operational Risk Officer. Both of these officers, Heller believes will contribute to the sustainability at Heller Financial, in an attempt to avoid credit risk exposure, management risk exposure, and operational risk exposure.

Adaptive Bernstein Copulas and Risk Management
Dietmar Pfeifer,Olena Ragulina

We present a constructive approach to Bernstein copulas with an admissible discrete skeleton in arbitrary dimensions when the underlying marginal grid sizes are smaller than the number of observations. This prevents an overfitting of the estimated dependence model and reduces the simulation effort for Bernstein copulas a lot. In a case study, we compare different approaches of Bernstein and Gaussian copulas w.r.t. the estimation of risk measures in risk management.

Analysis of Insolvency Proceedings in Spain Against the Backdrop of the COVID-19 Crisis: Insolvency Proceedings, Pre-Insolvency Arrangements and the Insolvency Moratorium
García-Posada, Miguel
The inefficiency of Spanish insolvency proceedings â€" evidenced by their length and reflected in the fact that non-financial corporations and sole proprietors make limited use of both insolvency proceedings and pre-insolvency arrangements â€" is a structural shortcoming of the Spanish economy. It is a problem that has become particularly important against the backdrop of the COVID 19 crisis and the severe impact it is having on the financial situation of Spanish firms, despite the broad range of public measures introduced to mitigate it. This document analyses the functioning of the insolvency system, examines the pros and cons of the insolvency moratorium currently in place and proposes various alternatives that could make the system more efficient when the moratorium expires at the end of the year.

Are Bigger Banks Better? Firm-Level Evidence from Germany
Huber, Kilian
The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in postwar Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers.

Asset Price Bubbles in market models with proportional transaction costs
Francesca Biagini,Thomas Reitsam

We study asset price bubbles in market models with proportional transaction costs $\lambda\in (0,1)$ and finite time horizon $T$ in the setting of [49]. By following [28], we define the fundamental value $F$ of a risky asset $S$ as the price of a super-replicating portfolio for a position terminating in one unit of the asset and zero cash. We then obtain a dual representation for the fundamental value by using the super-replication theorem of [50]. We say that an asset price has a bubble if its fundamental value differs from the ask-price $(1+\lambda)S$. We investigate the impact of transaction costs on asset price bubbles and show that our model intrinsically includes the birth of a bubble.

Bank Capital and Real GDP Growth
Boyarchenko, Nina,Giannone, Domenico,Kovner, Anna
We study the relationship between bank capital ratios and the distribution of future real GDP growth. Growth in the aggregate bank capital ratio corresponds to a smaller left tail of GDPâ€"smaller crisis probabilityâ€"but at the cost of a smaller right tail of growth outcomesâ€"smaller probability of exuberant growth. This trade-off persists at horizons of up to eight quarters, highlighting the long-range consequences of changes in bank capital. We show that the predictive information in bank capital ratio growth is over and above that contained in real credit growth, suggesting importance for bank capital beyond supplying credit to the nonfinancial sector. Our results suggest that coordination between macroprudential and monetary policy is crucial for supporting stable growth.

Blackberry’s Acquisition of Cylance Inc.: An Impact On Cyber-Security
Branch, Ty
In this article Casacchia proposes that Cylance Inc. is a very reputable security firm with lots of deep-pocket buyers taking notice of the company. Blackberry will takeover the headquarters’ in Irvine, California considered the largest acquisition in the last 34 years of Blackberry’s history. Moreover, Blackberry is moving away from cellphones to a cyber-security platform as it reinvents itself, to stay profitable. Casacchia follows the senior manager's road seeking the acquisition of Cylance a move that will give Blackberry control over Dell, Gap Inc., and Panasonic all partners to Cylance with 15 million Internet hardware devices to serve under its umbrella.

Business Cycles as Collective Risk Fluctuations
Victor Olkhov

We suggest use continuous numerical risk grades [0,1] of R for a single risk or the unit cube in Rn for n risks as the economic domain. We consider risk ratings of economic agents as their coordinates in the economic domain. Economic activity of agents, economic or other factors change agents risk ratings and that cause motion of agents in the economic domain. Aggregations of variables and transactions of individual agents in small volume of economic domain establish the continuous economic media approximation that describes collective variables, transactions and their flows in the economic domain as functions of risk coordinates. Any economic variable A(t,x) defines mean risk XA(t) as risk weighted by economic variable A(t,x). Collective flows of economic variables in bounded economic domain fluctuate from secure to risky area and back. These fluctuations of flows cause time oscillations of macroeconomic variables A(t) and their mean risks XA(t) in economic domain and are the origin of any business and credit cycles. We derive equations that describe evolution of collective variables, transactions and their flows in the economic domain. As illustration we present simple self-consistent equations of supply-demand cycles that describe fluctuations of supply, demand and their mean risks.

Conservation Laws in a Limit Order Book
Jan Rosenzweig

We present a class of macroscopic models of the Limit Order Book to simulate the aggregate behaviour of market makers in response to trading flows. The resulting models are solved numerically and asymptotically, and a class of similarity solutions linked to order book formation and recovery is explored. The main result is that order book recovery from aggressive liquidity taking follows a simple $t^{1/3}$ scaling law.

Consumption smoothing in the working-class households of interwar Japan
Kota Ogasawara

I analyze Osaka factory worker households in the early 1920s, whether idiosyncratic income shocks were shared efficiently, and which consumption categories were robust to shocks. While the null hypothesis of full risk-sharing of total expenditures was rejected, factory workers maintained their households, in that they paid for essential expenditures (rent, utilities, and commutation) during economic hardship. Additionally, children's education expenditures were possibly robust to idiosyncratic income shocks. The results suggest that temporary income is statistically significantly increased if disposable income drops due to idiosyncratic shocks. Historical documents suggest microfinancial lending and saving institutions helped mitigate risk-based vulnerabilities.

Corporate ESG Profiles, Matching, and the Cost of Bank Loans
Shin, David (Dongheon)
This paper examines the impact of corporate Environmental, Social, and Governance (ESG) profiles on the formation of lending relationships between firms and banks, and the implications of this matching for loan pricing. I find that high ESG firms are more likely to receive a bank loan, and their loans come with lower interest rates. These effects, however, are driven by banks previously linked to a group of borrowers with low sustainability performance. These findings suggest that low ESG banks have a stronger incentive to improve their ESG profile by linking themselves to high ESG-rated firms, and thus they are willing to provide a loan with a lower spread. I support these findings using the FTSE4Good US Index rebalance events as shocks to borrowers' ESG reputation.

Directors’ Remuneration and Performance: Evidence from the Textile Sector of Bangladesh
Hossain, Balal
This study investigates the impact of board incentives as proxied by directors` remuneration on the financial performance of listed textile companies in Bangladesh. Using Generalized Method of Moments (GMM) and data pertaining to listed textile companies of Dhaka Stock Exchange (DSE) during the period from 2011 to 2017 (resulting in a total of 140 firm-year observations), we have estimated the firm performance equation involving directors’ remuneration and board independence as the independent variables and some other control variables like firm age, size, leverage, and operating efficiency. The results reveal that there is a negative association between board remuneration and firm performance. In addition, this study finds no significant relationship between board independence and firm performance of the sample firms. Our findings suggest that higher pay to the board does not stimulate higher firm performance and, in turn, results in shareholders getting nothing in return from this and, hence, is a matter of great concern for them. Moreover, our results indirectly indicate that currently directors` remuneration in Bangladesh is not aligned with the firm performance, which has been emphasized in extant corporate governance literature. Besides, this paper further raises questions about the effectiveness of independent directors in the boards of textile firms in Bangladesh.

Do Corporate Managers Learn from Short Sellers? Evidence from A Randomized Experiment
Liu, Baixiao,McConnell, John J.,Schrowang, Andrew
We examine how the exemption of short-sale uptick tests due to the Regulation SHO pilot program affects managers’ decisions to abandon value-reducing acquisition attempts. We find that when deciding whether to abandon value-reducing acquisition attempts during the pilot program, managers of pilot firms, whose stocks are less subject to short selling impediments, are more sensitive to stock price changes than managers of nonpilot firms. We find no difference in managers’ sensitivity prior to nor post the program. These results suggest that, despite managers’ repugnance toward short sellers, they learn more from stock price changes when short sellers are less impeded in the price setting process.

Do competent women receive unfavorable treatment?
Yuki Takahashi

Do competent women receive unfavorable treatment than equally competent men? I study this question in a laboratory experiment where unfavorable treatment has material consequences. I find that neither men nor women treat competent women less favorably; if anything, both men and women treat competent women slightly more favorably than equally competent men. The findings provide a piece of evidence that competent women may not necessarily receive unfavorable treatment in settings with material consequences, which may shed new light on hiring and promotion practices in labor markets.

Does Regulatory and Supervisory Independence Affect Financial Stability?
Fraccaroli, Nicolò,Sowerbutts, Rhiannon,Whitworth, Andrew
Since the crisis financial regulators and supervisors have been given increased independence from political bodies. But there is no clear evidence of the benefits of these reforms on the stability of the banking sector. This paper fills that void, introducing a new dataset of reforms to regulatory and supervisory independence for 43 countries from 1999-2019. We combine this index with bank-level data to investigate the impact of reforms in independence on financial stability. We find that reforms that bring greater regulatory and supervisory independence are associated with lower non-performing loans in banks’ balance sheets. In addition, we provide evidence that these improvements do not come at the cost of bank efficiency and profitability. Overall, our results show that increasing the independence of regulators and supervisors is beneficial for financial stability.

E-Commerce to Improve Homemaker Productivity (Women Entrepreneur Empowerment at Meruya Utara, Kembangan District, West Jakarta, Indonesia)
Nugroho, Lucky,Hidayah, Nurul
[enter Abstract Body]The current phenomenon is that many homemakers have a side business following their skills and hobbies that aim to help their household financial needs. Previous research has shown that homemakers who are also women entrepreneurs have a significant contribution to family welfare. However, there are difficulties from homemakers in marketing their products and services. The method used in this international community service is socialization related to how to create an e-commerce account and use it as an alternative to selling their products and services. Furthermore, the outcome of this service activity is that homemakers can sell their products and services through e-commerce. According to the survey results on this socialization activity, it is known that the obstacle for homemakers is that education is still low, 65% of them have high school and junior high school education. Also, internet banking and mobile banking application ownership are still small, at 35%. Thus, the low ownership of internet banking and mobile banking applications has made it difficult for them to sell through e-commerce. All participants of the socialization stated that this activity was useful and increased their knowledge. Next to be able to increase their sales turnover is through improvements to the packaging of their products and services to make it more attractive to buyers.

Face-to-face Interactions, Tenant Resilience, and Commercial Real Estate Performance
Wang, Chongyu,Zhou, Tingyu
The COVID-19 pandemic has introduced an exogenous shock to the face-to-face (FTF) economy and the use of commercial space. By exploiting a new dataset that links tenants, commercial properties, and stakeholders (including equity holders and lenders) in these properties, we examine whether and how the dependence of commercial tenants’ business operations on FTF interactions affect commercial real estate performance during the pandemic. We construct three novel FTF measures at both the property and firm levels to capture remote working by tenants, internal communication between coworkers, and external contact with customers. We find that firms holding properties with tenants that are less resilient to social distancing experienced greater declines in abnormal returns in response to COVID spread (growth in the number of cases), more negative market reactions around lockdown and reopening announcements, and lower analyst earnings expectations. Evidence based on property-level mortgage spreads of collateralized loans is consistent with these findings. Our findings are unlikely to be explained by variation in a building’s property type or in a property-owning firm’s property-type focus.

Fragmentation in trader preferences among multiple markets: Market coexistence versus single market dominance
Robin Nicole,Aleksandra Alorić,Peter Sollich

Technological advancement has lead to an increase in number and type of trading venues and diversification of goods traded. These changes have re-emphasized the importance of understanding the effects of market competition: does proliferation of trading venues and increased competition lead to dominance of a single market or coexistence of multiple markets? In this paper, we address these questions in a stylized model of Zero Intelligence traders who make repeated decisions at which of three available markets to trade. We analyse the model numerically and analytically and find that parameters that govern traders' decisions -- memory length and intensity of choice, e.g. how strongly decisions are based on past success -- make the key distinctions between consolidated and fragmented steady states of the population of traders. All three markets coexist with equal shares of traders only when either learning is too weak and traders choose randomly, or when markets are identical. In the latter case, the population of traders is fragmented across the markets. For the more general case of markets with different biases, we note that market dominance is the more typical scenario. These results are interesting because previously either strong differentiation of markets or heterogeneity in the needs of traders was found to be a necessary condition for market coexistence. We show that, in contrast, these states can emerge simply as a consequence of co-adaptation of an initially homogeneous population of traders.

Global pathways to sustainable development to 2030 and beyond
Enayat A. Moallemi,Sibel Eker,Lei Gao,Michalis Hadjikakou,Jan Kwakkel,Patrick M. Reed,Michael Obersteiner,Brett A. Bryan

Progress to-date towards the ambitious global 2030 agenda for sustainable development has been limited, and upheaval from the COVID-19 pandemic will further exacerbate the already significant challenges to Sustainable Development Goal (SDG) achievement. Here, we undertake a model-based global integrated assessment to characterise alternative pathways towards 36 time-bound, science-driven targets by 2030, 2050, and 2100. We show that it will be unlikely to jointly achieve socioeconomic and environmental targets by 2030, even under the most optimistic pathways and the least ambitious targets. Nonetheless, humanity can still avoid destabilisation of the Earth system and increase socioeconomic prosperity post-2030 via a Green Recovery pathway. A Green Recovery by mid- and end of the century requires reducing global population by 5% and 26%, empowering sustainable economic development by 32% and 52%, increasing education availability by 10% and 40%, reducing the total global fossil energy production by 36% and 80%, reducing agricultural land area by 7% and 10%, and promoting healthy and sustainable lifestyles by lowering consumption of animal-based foods (i.e., meat and dairy) by 39% and 50%, compared to the business-as-usual trajectories for 2050 and 2100, respectively. Our results show that the combination of these changes together towards extended, more ambitious goals by 2050 and 2100 is central to the transformative change needed to ensure that both people and planet prosper in medium- and long-term futures.

How CEO-Friendly Should Boards With Limited Attention Be?
Gregor, Martin,Michaeli, Beatrice
A CEO who is an empire-builder reports information about an investment opportunity ("project"). Before approving or rejecting the project, a board of directors decides whether and how much additional information to collect, i.e., whether to remain rationally inattentive. We find that the CEO prepares and communicates a report that is just sufficiently precise so as to persuade the board not to learn any additional information and to approve some value-destroying projects (type-I error). The informativeness of the report is increasing in the misalignment of interests between the board and the CEO. Because more informative reports reduce the probability of approval error, the shareholders may optimally assemble a board that is "unfriendly" to the CEO. Our results predict that (i) board-dependence regulations lead to decrease in corporate investments but an increase in return to shareholders; (ii) the return on investment is lower in companies with busy directors operating in less mature industries; (iii) the conflict of interests between boards and CEOs is either mild or moderately strong and the likelihood of strong conflict is lower in companies with busy directors and companies operating in mature industries or industries with attractive outside opportunities for directors.

IT Shields: Technology Adoption and Economic Resilience During the COVID-19 Pandemic
Pierri, Nicola,Timmer, Yannick
We study the economic effects of information technology (IT) adoption during the COVID-19 pandemic. Using data on IT adoption covering almost three million establishments in the US, we find that technology adoption can partly shield the economy from the impact of the pandemic. In areas where firms adopted more IT the unemployment rate rose less in response to social distancing. Our estimates imply that if the pandemic had hit the world 5 years ago, the resulting unemployment rate would have been 2 percentage points higher during April and May 2020 (16% vs. 14%), due to the lower availability of IT. Local IT adoption mitigates the labor market consequences of the pandemic for all individuals, regardless of gender and race, except those with the lowest level of educational attainment.

Informed Trading and the Dynamics of Client-dealer Connections in Corporate Bond Markets
Czech, Robert,Pinter, Gabor
Using a unique non-anonymous dataset, covering virtually all secondary market trades in the UK corporate bond market, we show that clients outperform when they trade with more dealers. The effect is stronger for informationally sensitive clients (holding CDS positions on the issuer), assets (high-yield bonds), and during informationally intensive days (macro/rating announcements). The results are consistent with clients varying the number of dealers they trade with to conceal private information. Various tests support our information-based interpretation, ruling out alternative explanations related to uninformed demand and supply. Identifying clients who simultaneously trade in government and corporate bonds reveals that the informational role of connections is larger and more persistent in the corporate bond market. Using a Kyle (1989)-type model, we show that both the degree of inter-dealer competition and the magnitude of private information could, in theory, explain the strength of the performance-connection relation. The empirical evidence supports the mechanism related to the magnitude of private information, while the inter-dealer competition channel is rejected by the data.

Insider Trading and Strategic Disclosure
Mitts, Joshua
I show that public companies disproportionately disclose positive news on days when corporate executives sell shares under predetermined Rule 10b5-1 plans. I find that the likelihood, share volume and dollar volume of insider sales under 10b5-1 plans are higher when good news is disclosed, and each of these are higher when the disclosed news is better. Disclosure of good news on Rule 10b5-1 selling days is greatest in the health care sector and among mid-cap firms. I show that stock prices reverse after high levels of Rule 10b5-1 selling on positive news days, and that the price reversal increases with the share volume of Rule 10b5-1 selling. I show that, whatever might be said about health care executives’ advantageous stock sales as they developed vaccines during the pandemic of 2020, those sales were not uncommon.

Insurance valuation: A two-step generalised regression approach
Karim Barigou,Valeria Bignozzi,Andreas Tsanakas

Current approaches to fair valuation in insurance often follow a two-step approach, combining quadratic hedging with application of a risk measure on the residual liability, to obtain a cost-of-capital margin. In such approaches, the preferences represented by the regulatory risk measure are not reflected in the hedging process. We address this issue by an alternative two-step hedging procedure, based on generalised regression arguments, which leads to portfolios that are neutral with respect to a risk measure, such as Value-at-Risk or the expectile. First, a portfolio of traded assets aimed at replicating the liability is determined by local quadratic hedging. Second, the residual liability is hedged using an alternative objective function. The risk margin is then defined as the cost of the capital required to hedge the residual liability. In the case quantile regression is used in the second step, yearly solvency constraints are naturally satisfied; furthermore, the portfolio is a risk minimiser among all hedging portfolios that satisfy such constraints. We present a neural network algorithm for the valuation and hedging of insurance liabilities based on a backward iterations scheme. The algorithm is fairly general and easily applicable, as it only requires simulated paths of risk drivers.

Internet Appendix for State-Varying Factor Models of Large Dimensions
Pelger, Markus,Xiong, Ruoxuan
The Internet Appendix collects the proofs and additional results that support the main text. The additional theoretical results include a detailed description of special cases and related models and an extension to noisy and misspecified state processes. We also provide an estimator for the number of factors. The additional empirical results consider alternative state processes and discuss the choice of tuning parameters. We also study a portfolio application of our state-varying factors. The extensive simulation section compares the performance relative to alternative latent factor models that allow for time-variation and studies the choice of bandwidth and number of factors with cross-validation arguments. Lastly, we collect the detailed proofs for all the theoretical statements.

Learning Choice Functions: Concepts and Architectures
Karlson Pfannschmidt,Pritha Gupta,Eyke Hüllermeier

We study the problem of learning choice functions, which play an important role in various domains of application, most notably in the field of economics. Formally, a choice function is a mapping from sets to sets: Given a set of choice alternatives as input, a choice function identifies a subset of most preferred elements. Learning choice functions from suitable training data comes with a number of challenges. For example, the sets provided as input and the subsets produced as output can be of any size. Moreover, since the order in which alternatives are presented is irrelevant, a choice function should be symmetric. Perhaps most importantly, choice functions are naturally context-dependent, in the sense that the preference in favor of an alternative may depend on what other options are available. We formalize the problem of learning choice functions and present two general approaches based on two representations of context-dependent utility functions. Both approaches are instantiated by means of appropriate neural network architectures, and their performance is demonstrated on suitable benchmark tasks.

Liquidity Management, Fire Sale and Liquidity Crises in Banking: The Role of Leverage
Gomez, Fabiana,Vo, Quynh-Anh
This paper proposes a positive theory of the link between banks’ capitalisation and their liquidity-risk taking as well as the severity of fire-sale problems and liquidity crises. In the basic framework of an individual bank’s decisions, we find that banks’ incentives to hold liquidity for precautionary reason are increasing with their capital. In a continuum-of-banks setting in which both precautionary and speculative motives of liquidity holdings are taken into account, we find that while the fire-sale discount is decreasing with the capitalisation of the banking system, the link between the latter and the severity of liquidity crises is not monotonic.

Minimizing Spectral Risk Measures Applied to Markov Decision Processes
Nicole Bäuerle,Alexander Glauner

We study the minimization of a spectral risk measure of the total discounted cost generated by a Markov Decision Process (MDP) over a finite or infinite planning horizon. The MDP is assumed to have Borel state and action spaces and the cost function may be unbounded above. The optimization problem is split into two minimization problems using an infimum representation for spectral risk measures. We show that the inner minimization problem can be solved as an ordinary MDP on an extended state space and give sufficient conditions under which an optimal policy exists. Regarding the infinite dimensional outer minimization problem, we prove the existence of a solution and derive an algorithm for its numerical approximation. Our results include the findings in B\"auerle and Ott (2011) in the special case that the risk measure is Expected Shortfall. As an application, we present a dynamic extension of the classical static optimal reinsurance problem, where an insurance company minimizes its cost of capital.

Mislearning from Censored Data: The Gambler's Fallacy in Optimal-Stopping Problems
Kevin He

I study endogenous learning dynamics for people expecting systematic reversals from random sequences - the "gambler's fallacy." Biased agents face an optimal-stopping problem. They are uncertain about the underlying distribution and learn its parameters from predecessors. Agents stop when early draws are "good enough," so predecessors' experience contain negative streaks but not positive streaks. Since biased agents understate the likelihood of consecutive below-average draws, society converges to over-pessimistic beliefs about the distribution's mean and stops too early. Agents uncertain about the distribution's variance overestimate it to an extent that depends on predecessors' stopping thresholds. Subsidizing search partially mitigates long-run belief distortions.

Model-Independent Price Bounds for Catastrophic Mortality Bonds
Raj Kumari Bahl,Sotirios Sabanis

In this paper, we are concerned with the valuation of Catastrophic Mortality Bonds and, in particular, we examine the case of the Swiss Re Mortality Bond 2003 as a primary example of this class of assets. This bond was the first Catastrophic Mortality Bond to be launched in the market and encapsulates the behaviour of a well-defined mortality index to generate payoffs for bondholders. Pricing these type of bonds is a challenging task and no closed form solution exists in the literature. In our approach, we express the payoff of such a bond in terms of the payoff of an Asian put option and present a new approach to derive model-independent bounds exploiting comonotonic theory as illustrated in \cite{prime1}, \cite{2} and \cite{Simon} for the pricing of Asian options. We carry out Monte Carlo simulations to estimate the bond price and illustrate the quality of the bounds.

OTC Discount
de Roure, Calebe,Moench, Emanuel,Pelizzon, Loriana,Schneider, Michael
We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vast majority of OTC prices are favorable with respect to exchange quotes. This is a challenge for theories of OTC markets centered around search frictions but consistent with models of hybrid markets based on information frictions. We show empirically that proxies for both frictions determine variation in the discount, which is largely passed on to customers. Dealers trade on the exchange for immediacy and via brokers for opacity and anonymity, highlighting the complementary roles played by the different protocols.

Portfolio Optimisation within a Wasserstein Ball
Silvana Pesenti,Sebastian Jaimungal

We consider the problem of active portfolio management where a loss-averse and/or gain-seeking investor aims to outperform a benchmark strategy's risk profile while not deviating too much from it. Specifically, an investor considers alternative strategies that co-move with the benchmark and whose terminal wealth lies within a Wasserstein ball surrounding it. The investor then chooses the alternative strategy that minimises their personal risk preferences, modelled in terms of a distortion risk measure. In a general market model, we prove that an optimal dynamic strategy exists and is unique, and provide its characterisation through the notion of isotonic projections. Finally, we illustrate how investors with different risk preferences invest and improve upon the benchmark using the Tail Value-at-Risk, inverse S-shaped distortion risk measures, and lower- and upper-tail risk measures as examples. We find that investors' optimal terminal wealth distribution has larger probability masses in regions that reduce their risk measure relative to the benchmark while preserving some aspects of the benchmark.

Quantum Technology for Economists
Isaiah Hull,Or Sattath,Eleni Diamanti,Göran Wendin

Research on quantum technology spans multiple disciplines: physics, computer science, engineering, and mathematics. The objective of this manuscript is to provide an accessible introduction to this emerging field for economists that is centered around quantum computing and quantum money. We proceed in three steps. First, we discuss basic concepts in quantum computing and quantum communication, assuming knowledge of linear algebra and statistics, but not of computer science or physics. This covers fundamental topics, such as qubits, superposition, entanglement, quantum circuits, oracles, and the no-cloning theorem. Second, we provide an overview of quantum money, an early invention of the quantum communication literature that has recently been partially implemented in an experimental setting. One form of quantum money offers the privacy and anonymity of physical cash, the option to transact without the involvement of a third party, and the efficiency and convenience of a debit card payment. Such features cannot be achieved in combination with any other form of money. Finally, we review all existing quantum speedups that have been identified for algorithms used to solve and estimate economic models. This includes function approximation, linear systems analysis, Monte Carlo simulation, matrix inversion, principal component analysis, linear regression, interpolation, numerical differentiation, and true random number generation. We also discuss the difficulty of achieving quantum speedups and comment on common misconceptions about what is achievable with quantum computing.

Self-Regulation and Governmental Oversight: A Theoretical and Experimental Study
Van Koten, Silvester
A self-regulatory organization (SRO) is a non-governmental organization owned and operated by its members, with the power to create and enforce industry regulations and standards for its members. A key question is whether oversight by an SRO can replace governmental oversight, or whether supplementary governmental oversight is necessary. Using a formal model for the financial sector, and solving simultaneous games, I show that a lack of commitment by the SRO may necessitate governmental oversight of both SRO members and the SRO itself. The core of the model is supported by economics experiments.

Separating Retail and Investment Banking: Evidence from the UK
Chavaz, Matthieu,Elliott, David
The idea of separating retail and investment banking remains controversial. Exploiting the introduction of UK ring-fencing requirements in 2019, we document novel implications of such separation for credit and liquidity supply, competition, and risk-taking via a funding structure channel. By preventing conglomerates from using retail deposits to fund investment banking activities, this separation leads conglomerates to rebalance their activities towards domestic mortgage lending and away from supplying credit lines and underwriting services to large corporates. By redirecting the benefits of deposit funding towards the retail market, this rebalancing reduces the cost of credit for households, without eroding lending standards. However the rebalancing also increases mortgage market concentration and risk-taking by smaller banks via indirect competition effects.

Systemic Risk in Market Microstructure of Crude Oil and Gasoline Futures Prices: A Hawkes Flocking Model Approach
Hyun Jin Jang,Kiseop Lee,Kyungsub Lee

We propose the Hawkes flocking model that assesses systemic risk in high-frequency processes at the two perspectives -- endogeneity and interactivity. We examine the futures markets of WTI crude oil and gasoline for the past decade, and perform a comparative analysis with conditional value-at-risk as a benchmark measure. In terms of high-frequency structure, we derive the empirical findings. The endogenous systemic risk in WTI was significantly higher than that in gasoline, and the level at which gasoline affects WTI was constantly higher than in the opposite case. Moreover, although the relative influence's degree was asymmetric, its difference has gradually reduced.

The Dark Side of Audit Market Competition
Pan, Yue,Shroff, Nemit,Zhang, Pengdong
This paper examines the relation between audit market competition and audit quality. We use the staggered introduction of bullet trains in China as shocks to travel time between audit clients and prospective audit firms, which increases the threat of competition for incumbent audit firms. Using a generalized difference-in-differences design, we find that the increased threat of competition induced by the opening of a bullet train route in a city leads to a 4.9 percentage point (pp) increase in the rate of GAAP violations and a 2.5 pp decrease in modified audit opinions for clients headquartered in the city. We also find that bullet train connectivity leads to a 1.7 pp decrease in income-decreasing adjustments to earnings during year-end audits but no change in income-increasing audit adjustments. Results from several cross-sectional tests, an instrumental variables test, and a placebo test help mitigate endogeneity concerns. Our paper contributes to the literature by providing plausibly causal evidence that competition lowers audit quality.

The Economics of Central Clearing
Menkveld, Albert J.,Vuillemey, Guillaume
Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007-2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies which, along with classical studies, are surveyed in this article. Discussed are, for example, multilateral netting, the insurance against counterparty risk, the effect of CCPs on asset prices and fire sales, margins setting, the default waterfall, and CCP governance. We review both CCP theory and empirics, and conclude by discussing regulatory issues.

The Effect of Tax Avoidance Crackdown on Corporate Innovation
Li, Qin,Ma, Mark (Shuai),Shevlin, Terry J.
To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.

The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model
Bennani, Hamza,Neuenkirch, Matthias
We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area over the period 2003Q1â€"2019Q4 with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states (e.g., a normal state and a crisis state), using an underlying logit model determining the relative weight of these states over time. We show that shocks to the credit spread and shocks to credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. Credit standards and the credit spread are also the key determinants of the underlying state of the economy in the logit submodel. Together with a more pronounced transmission of monetary policy shocks in the crisis state, this provides further evidence for a financial accelerator in the euro area. Finally, the detrimental effect of credit conditions is also reflected in the labor market.

The Impact of Trustees' Age and Representation on Strategic Asset Allocations
Bauer, Rob,Bogman, Rien,Bonetti, Matteo,Broeders, Dirk
A board of trustees has the fiduciary duty to invest a pension fund's assets in the best interest of its beneficiaries. Trustees' characteristics should not affect their investment decisions. We find two counterfactual artefacts for corporate pension funds. First, a higher average board age lowers the strategic allocation to equity by 7 percentage points after controlling for the pension fund's characteristics. This way the strategic asset allocation does not fully reflect the beneficiaries' characteristics. Second, pension funds with a greater representation of employers on the board allocate more to equities. This fosters a principal-agent problem between employer trustees and beneficiaries.

The Merger of T-Mobile and Sprint
Branch, Ty
First, this paper aims to research and document the merger between two Companies. T-Mobile [Nasdaq] and Sprint [NYSE]. This merger is an agreement between the two wireless networks to undertake and unite the two in a prevailing agreement merger into one entity. Next, this strategic alliances, which accounts for the company willingness to consolidate with another company is an opportunity they both seek. The reasons for the merger with these two companies are to gain the market shares or to expand into new business segments (DePamphilis, 2017). Hence, the primary reason for each of these company's involving themselves into this activity is to please shareholders. Hence, a merger could be a vertical move, horizontal move, market extension, product extension or a conglomerate (DePamphilis, 2017). What we know about T-Mobile (TMUS) that it was considered a downtrodden wireless carrier in 2012 trying to change the employee’s morale in 2017 as the revenue started to rise, after the announcement of a merger with Sprint (Lieberman, 2019). Thus, T-Mobile had a bad year at the start of 2012 with major disappointments in market shares dropping behind Verizon (VZ), and AT&T (T) in the number of subscriber.

The Prospectus Regulation (Regulation (EU) 2017/1129) and the Recent Proposal for an EU Recovery Prospectus: Elements of Continuity and Change with the Past and the Way Forward
Gortsos, Christos,Terzi, Marialena E.
The purpose of this article is twofold. First, it aims to provide a concise, but comprehensive overview of the Prospectus Regulation’s main provisions, highlighting the changes introduced to the previously applicable regime. Second, it carefully analyses the way in which the EU legislator strives to deploy the prospectus regime as an effective response to the current COVID-19 pandemic crisis.The point of reference, when analysing the provisions of the Prospectus Regulation, is the Prospectus Directive and emphasis is placed on the obligations of “issuers” or “offerors” making offers of securities to the public or persons asking for the admission to trading on a regulated market of securities (see below, under B). The article also makes a brief reference to the obligations of financial intermediaries (mainly as underwriters) (under C) and, finally, provides a comprehensive analysis of the recent Proposal for a temporary EU Recovery Prospectus regime (under D).

Tracking GDP in real-time using electricity market data: insights from the first wave of COVID-19 across Europe
Carlo Fezzi,Valeria Fanghella

This paper develops a methodology for tracking in real time the impact of shocks (such as natural disasters, financial crises or pandemics) on gross domestic product (GDP) by analyzing high-frequency electricity market data. As an illustration, we estimate the GDP loss caused by COVID-19 in twelve European countries during the first wave of the pandemic. Our results are almost indistinguishable from the official statistics of the recession during the first two quarters of 2020 (correlation coefficient of 0.98) and are validated by several robustness tests. However, they are also more chronologically disaggregated and up-to-date than standard macroeconomic indicators and, therefore, can provide crucial and timely information for policy evaluation. Our results show that delaying intervention and pursuing 'herd immunity' have not been successful strategies so far, since they increased both economic disruption and mortality. We also find that coordinating policies internationally is fundamental for minimizing spillover effects from NPIs across countries.

US Housing Market During COVID-19: Aggregate and Distributional Evidence
Zhao, Yunhui
Using zip code-level data and nonparametric estimation, I present eight stylized facts on the US housing market in the COVID-19 era. Some aggregate results are: (1) growth rate of median housing price during the four months (April-August 2020) since the Federal Reserve's unprecedented monetary easing has accelerated faster than any four-month period in the lead-up to the 2007-09 global financial crisis; (2) the increase in housing demand in response to lower mortgage interest rates displays a structural break since March 2020 (housing demand has increased by much more than before). These results indicate either the existence of 'fear of missing out' or COVID-induced fundamental changes in household behavior. In terms of distributional evidence, I find that the increase of housing demand seems more pronounced among the two ends of the income distribution, possibly reflecting relaxed liquidity constraints at the lower end and speculative demand at the higher end. I also find that the developments in housing price, demand, and supply since April 2020 are similar across urban, suburban, and rural areas. The paper highlights some potential unintended consequences of COVID-fighting policies and calls for further studies of the driving forces of the empirical findings.

Unveiling the Effects of Foreign Exchange Interventions: Evidence from the Kyrgyz Republic
Poghosyan, Tigran
This paper analyzes determinants and consequences of FX interventions in the Kyrgyz Republic. Most of the literature on the topic focuses on advanced and emerging economies and this paper provides new evidence from a low-income country. We find that FX interventions take place in response to movements in the exchange rate and its volatility. There is also evidence of 'leaning against the wind', which is more pronounced for relatively larger FX sales and purchases. The 'leaning against the wind' is asymmetric toward FX sales and largely reflects leaning against depreciation of domestic currency. We document a varying degree of de-facto exchange rate stability despite the de-jure floating exchange rate regime. During most of the sample, the exchange rate management index was relatively low in line with the floating exchange rate regime, with the exception of the period from 2018 Q4 until the COVID-19 shock, during which the exchange rate management index was relatively high.

What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Plan Account Balances, 2010â€"2018
Holden, Sarah,VanDerhei, Jack,Bass, Steven
This paper provides an update of a longitudinal analysis of 401(k) plan participants drawn from the Employee Benefit Research Institute (EBRI)/Investment Company Institute (ICI) 401(k) database. Because the annual cross sections cover participants with a wide range of participation experience in 401(k) plans, meaningful analysis of the potential for 401(k) participants to accumulate retirement assets must examine the 401(k) plan accounts of participants who maintained accounts over all of the years being studied (consistent participants). For example, because of changing samples of providers, plans, and participants, changes in account balances for the entire database are not a reliable measure of how individual participants have fared. A consistent sample is necessary to accurately gauge changes, such as growth in account balances, experienced by individual 401(k) plan participants over time.A few key insights emerge from looking at the 1.9 million consistent participants in the EBRI/ICI 401(k) database over the eight-year period from year-end 2010 to year-end 2018. The average 401(k) plan account balance for consistent participants rose each year from 2010 through year-end 2017 before edging down in 2018. Overall, the average account balance increased at a compound annual average growth rate of 13.9 percent from 2010 to 2018, rising from $63,756 to $180,251 at year-end 2018. The median 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 17.3 percent over the period, to $90,015 at year-end 2018. The growth in account balances for consistent participants generally exceeded the growth rate for all participants in the EBRI/ICI 401(k) database.

Zombies at Large? Corporate Debt Overhang and the Macroeconomy
Jordà, Ã'scar,Kornejew, Martin Gunter Michail,Schularick, Moritz,Taylor, Alan M.
With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near-universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy’s tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along.

Шта показују индекси концентрације: пример банковног сектора Србије (What Demonstrate Concentration Indices: Example of the Banking Sector of Serbia)
Bukvic, Rajko
Serbian abstract: У раду се приказују и анализирају основни показатељи који се користе у анализама концентрације на тржишту. Приказани су стандардни коефицијенти (CRn и HH), нешто реÑ'е коришћени (Ђинијев, Розенблатов и Тајдман-Холов), као и Линда-индекси и приступ заснован на Ð"аусовој кривој распореда удела тржишних учесника. Анализа резултата који се добијају на основу тих индекса извршена је на примеру банковног сектора Србије (без Косова и Метохије), за године 2016â€"2019. Коришћени су подаци из завршних рачуна банака за три билансне величине (укупна актива, капитал и пословни приход). Ð"обијене вредности показатеља илуструју неједнозначност резултата, и то како кад је реч о примењеним индексима, тако и у односу на примењену билансну величину. Све то указује на потребу да се у будућим анализама користи већи број показатеља и већи број билансних величина, као и да се тумачењу резултата приступа уз неопходну пажњу.English abstract: The paper shows and analyzes the main indicators that are used in the analyses of of the market concentration. It were demonstrated standard coefficients (CRn and HH), more rarely used (Gini, Rosenbluth and Tideman-Hall), and the Linda indices and approach based on the Gaus’ curve of the distribution of market shares. The analysis of the results was made on the example of banking sector of Serbia (without Kosovo and Metohija), for the years 2016â€"2019. It were used the banks’ balances three aggregates (total assets, capital and operating income). The values of indicators illustrate ambiguity of results, both in the case of used indices, as well as the used balance aggregate. All of these indicate the need of the use in future analyses many indicators and aggregates, and the need to interpret the results with necessary attention.